England's local government system must be fundamentally reformed to stop
ministers "humiliating" councils, a leading MP has said.

Graham Allen, the chair of the Commons Political and Constitutional Reform Select Committee, said councils were "on their knees" and needed a new remit.

Mr Allen was speaking after a dispute broke out between the coalition and local leaders over funding cuts.

Eric Pickles, the Communities Secretary, attacked councillors for threatening to close local services while "stashing" money in their cash reserves.

Mr Allen, whose committee publishes its report on the future of central and local government relations next month, said: "It appears there is no end to the indignities and humiliations that local government leaders are prepared to accept from Whitehall.

"Instead they need to work together and come up with a plan for their long term future.

"Such a plan needs to appeal to ministers and to rouse local government from its knees."

Mr Allen added: "Neither the oppressor nor the oppressed are comfortable with this relationship, together they need to work out a sustainable relationship.”

Mr Pickles told local authorities to dip into their funds rather than reduce spending on libraries, parks, bus services and bin collections.

The Communities Secretary intervened after council leaders complained that his department’s cuts to their annual budgets threatened to incite rioting and a wave of crime in northern cities.

Conservative leaders of rural councils said the reductions in their grants would “crucify” the countryside and drive voters into the arms of the UK Independence Party.

More than half of councils are believed to be preparing to defy ministers and increase council tax to fill the gap left by central government funding cuts Mr Pickles has said councils have a "moral" duty not to raise council tax next year.

The dispute follows Mr Pickles’s announcement earlier this month of the finance settlements for local authorities for the next two years. This will see councils’ “spending power” fall by 1.7 per cent in 2013-14 and by a further 3.8 per cent the following year.

However, Mr Pickles said councils had significantly increased their reserves of funding in recent years and should be prepared to use this money rather than cut services.

Figures from the Audit Commission disclosed that English councils’ cash reserves stand at £12.9 billion this year, £4.5 billion more than in 2007.

“It is unacceptable that some councils are stashing away billions, turning town halls into Fort Knox, whilst at the same time threatening to cut frontline services,” Mr Pickles told The Daily Telegraph.

“Given the steady rise in reserves over the past two years, it is irresponsible that certain sections of local government have chosen to needlessly scare the public with unfounded and baseless accusations.

“Whilst local authorities should maintain a healthy cushion, it's time for them to dip into their substantial reserves to ensure they protect frontline services, with a view to building up their reserves again in sunnier days to come.”

The Coalition faced a twin assault from Labour and Tory town halls on Sunday.

The council leaders of three of England's biggest cities - Newcastle, Liverpool and Sheffield - warned of increasing “social unrest” and community tensions in the north, which they said had suffered more as a result of austerity than the south.

There was also a backlash from rural authorities, mostly Conservative-led, who claim that the shires are disproportionately affected by cuts.

The Labour leaders of Newcastle, Liverpool and Sheffield - where Deputy Prime Minister Nick Clegg is an MP - wrote to a Sunday newspaper accusing the Westminster government of promoting “Dickensian” policies.

“Rising crime, increasing community tension and more problems on our streets will contribute to the break-up of civil society if we do not turn back,” they said.

“The unfairness of the Government's cuts is in danger of creating a deeply divided nation. We urge them to stop what they are doing now and listen to our warnings before the forces of social unrest start to smoulder.”

Separately, The Sunday Telegraph reported that more than 120 rural councils were considering a judicial review of the spending settlement for local authorities because it was “grossly unfair” and would hit services in remote areas.

Roger Begy, leader of Conservative-controlled Rutland Council and chairman of a new campaign called "Sparse", said: “Rural authorities for the last 10 to 12 years have been seriously under funded in relation to urban areas.

“We are going to have to do something. This is totally unfair and is going to crucify a lot of rural areas.”

According to House of Commons research, the average cuts in central government grants to councils, excluding ring-fenced funding for schools and colleges, will be 3.9 per cent for 2013-14.

Cuts for the following year in central government funding in England will amount to 8.5 per cent.

Councils are expected to boost their own incomes through business rates, which will deliver more money as the economy recovers and local trade increases, and also receive about £24 billion in council tax.